To Rent or to Buy…?

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Given the current economic state this country and others are currently experiencing, the housing market is showing no signs of improvement. First-time buyers are finding it harder and harder to save up their much needed deposit in order to attain a mortgage, and so are turning to long-term renting instead.

Many people are under the impression that renting can be far cheaper than buying, but is this really the case? Before taking the plunge, you may want to consider your options carefully before signing any contracts…

Buying is Cheaper

The rent rates have been ever growing around the country in recent years, while mortgage rates have actually dropped, meaning that it is much cheaper in the long run to own a house rather than rent. In fact, Halifax has suggested the average person could save up to 16% through buying rather than renting, which is a significant amount.

According to a report by the BBC, it’s even a better option for those living in the notoriously expensive regions in London: one case study found that those living in a house share could be paying around the same amount a month in order to own a house as they were currently paying for rent.

Make it Personal

Of course, these figures can vary wildly from person to person. While 16% is the average saving, some could save even more, whilst others may be in a much better position by renting. There are ways to figure out what would be best for you in just a few easy steps.

The first, and perhaps most obvious, thing to figure out is how much you could be saving with both methods. Using comparison sites will show you how much it would cost to rent the kind of house you’re looking for in a specific area, as well as how much it would cost to buy.

Once you’ve figured out how much it would cost to buy, you must study your savings carefully. You’ll need at least a 10% deposit, if not more, in order to purchase the house with a mortgage, so look at how much you currently have saved, and figure out how long it’ll take you to save up the rest if needed.

Finally, you’ll need to see the kind of mortgages which are available for the value you need, as well as calculating the rest of the costs involved in buying a house.

For buyers guides or to find more information and advice you may need when looking to move to a new home there are resources on the internet. I would strongly advise not to sign any contracts unless you are sure about what you are doing or have spoken to a financial advisor.

19 Comments

If you have the money to buy, then technically that is the cheaper option. It can be harder to puchase, but in the long run, it could be better. This always depends on the area that you want to live in.

I would suggest you run some numbers before you purchase a home. Also think about your time frame. If you are not sure you will be living in the same place for a while, you will be hard pressed to call it a good ‘investment’. Let’s make some assumptions here. $400k home, 10% down, 5.0% int rate (this is historically low for this loan to value ratio). Implies a $360k mtg balance. $2100 mthly payment. Over the first 5 years you pay $86k of interest, $42k principal. You paid a total of ~$167k (don’t forget the down payment) for a 20% ownership in your home (i.e. $82k of equity). That doesn’t sound like a good option to me. Plus, you can’t really leave after 5 years or you will have to pay early redemption fees for the mortgage, real estate commissions (~5%, on $400k, not the $82k you own), legal fees, etc. I’ve ignored the appreciation of the home (~2% on average), property taxes (~1%), and a lot of other costs. I’m not saying owning a home is a bad investment. I would personally recommend it to someone who plans to live there for a while as it forces you to save and offers great stability. I would definitely not call a home an investment though. Bottom line here is that you’ll hear a lot of people say renting is throwing away money or that only suckers buy a home and the real estate market is going to crash etc. The best thing anyone can do is run the numbers themselves. Don’t rely on me, the bank, a real estate agent, or anyone else to do it for you. If examine the true costs and are realistic about each option, you will discover what works best for you.

I agree here Steve. I don’t think there is any cookie-cutter solution to the buy-rent question. A lot of factors lie with the individual making the decision like, how big a mortgage would they be willing and qualify for? Do they plan on living in the same area for long? How is the real estate market in the area they wish to purchase a house. I couldn’t have put it more succintly, “Ran the numbers for yourself!”

My sister and her boyfriend are looking to buy a condo downtown and then sell in 5 years to buy a house. I ran some numbers, if they buy a condo for $300,000 with 10% down at 3.5% mortgage rate after 5 years they will have $47,000 of the mortgage paid off. If home prices rise by 2% a year and pay 5% commission, they’ll get $53,000 over and above the deposit they paid which is equal to about $450 per person per month in equity. If they rent and save that much each month for each person, they’ll be in same spot financially.

Funny part is if they put down 20% (which I think they may have) their gain in equity over and above the deposit and paying the commission will be about $48,0000 or $410 per month per person. (Thats a small difference considering its double the deposit)

If condo prices stay flat the gain drops to $20,000 to $24,000 or $200 per person per month. And if condo prices drop like I think they will, they’ll get pretty much lose. Just a 10% drop over 5 years or 2% a year, they’ll net an amount less then their deposit. With 10& down they lose about $3000 with 20% down they lose about $10,000.

And prices in Edmonton have been falling, my cousin sold her townhouse a few years back 2008 i think, for $280,000. Her neighbour the previous year sold for $300,000 plus, and her place was renovated and her neighbours wasnt! Run the numbers run the scenarios. Find out what would have to happen to get ahead and the likelyhood of that.

Renting a decent place has become so expensive these days. It is almost catching up with mortgage payments. I think even if a house comes with responsibilities, it has more benefits in the long run and that is where I am exploring options as I prepare to buy my first home some time in the future.

The creeping of rent is a rather worrisome trend. I guess in a few more years it may be quite high that it will be easier just taking a mortgage and buying a house. I think its almost agreeable across board that buying is the best option in the long run. Good luck with your house buying journey!

Nice article. It all depends on many factors. There is no easy way to decide. For one, I don’t believe that you make money when you buy a house or any other commercial real estate. You can’t go wrong if you keep that mantra in mind. Otherwise, I have seen friends screwing their credits because of making irrational and somewhat emotionally driven decision they have made. And these are very smart people otherwise. I wrote an article while ago to visually see if buying is a good decision based on the area the you live in.

Saving 16% by buying sounds really attractive although there are many considerations, like how far from work you will be if you get a new job and can’t sell the house, how fit is the house for your housing needs (if you start a family in the next 3 years and can’t sell), etc. I would rather pay a bit more and have the flexibility as a young adult because life evolves pretty quickly.

In general, I think that people tend to forget two things when they’re doing these calculations:

1. The impact of hidden costs (like repairs and maintenance, levies, etc); and 2. What could have been done with the money saved by renting instead of buying (including the initial deposit).

In most scenarios, unless the rental yields in the area are especially high (making rentals pretty close to mortgage repayments), it almost never pays you to buy the house.

But that’s just a financial point of view. Most people buy houses for the status, the security, and the white picket fence. And that’s fine. So long as you know that you’re actually going to pay for it in real terms – you can’t overlook it as some kind of sensible financial decision.

Unless, of course, you would normally spend the money saved on shoes. In which case, the argument is moot. And owning a house is an enforced savings scheme. Total financial sense!

Many people don’t look into every factor in home-ownership. Some people mentioned “property taxes”, you pay insurance every month, but no one really considers how much maintenance a house really costs.

There’s so many things in a house that if they break, need replacing, cleaning etc. cost 1000’s of dollars. your energy costs are higher, you may be on the hook for HOA fees not to mention closing costs, refinancing fees and all those other hidden fees.

Most people call owning a home a great “investment” but they only look at how much they paid for it compared to how much they sold it for without thinking about all those hidden costs I mentioned.

My wife and I will probably buy a house in the next couple years, but just wanted to share this as someone had mentioned that renting is “throwing money away” which is one of the biggest lies Fannie Mae/banks tell you.

Not to mention you have to save up tens of thousands of dollars on a down payment that you’ll never get back. Most people when they sell the house use the proceeds to buy the next house i.e. money never seen again.

We’re excited to get a house but just to give someone who’s on the fence; especially if you live alone, I can’t think of 1 good reason to buy a house.

Most people argue that it is better to buy than rent because the money you pay every month will go to something that you will own one day. Sometimes, you also have to factor in maintenance expenses and tax payments.

Exactly…owning a house also has its share of expenses and at the end of the day, it boils down to your financial situation and whether you are ready to settle in a house and undertake the maintenance costs and responsibilities that come with owning a house.

First National Real Estate Bennetts February 16, 2015 at 4:18 am - Reply

I totally agree – buying is cheaper in the long run. It takes a little bit of sacrifice saving for the down payment but having a house you can call your own is rewarding in the end.

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I don’t have mountains of debt. I haven’t overcome some crazy financial obstacles. I’m not a financial expert with vast knowledge to share. I’m not even willing to disclose my monthly finances in a nice report.
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